Preparing for auction: Part 1 – Appraising, budget setting, due diligence, reserves, low-ball offers & auction twists (Ep.73)

In this week’s episode, Dave, Cate and Pete take you through:

1. Inspecting and appraising – beware of underquoting! Don’t get unravelled by properties selling above the price guide given by the agent. The trio share how to work out a more accurate understanding of value.
2. Budget setting – home buyers v investors. There are key differences in the budget setting process for home buyers and investors to be aware of when setting a walkaway price. In the end, it should all come down to the numbers and factoring in ‘emotional premiums’ where appropriate.
3. Purchase price shouldn’t be determined by borrowing capacity. Many purchasers come undone with buyer’s remorse if they’ve allowed their upper limit to be dictated by borrowing capacity and haven’t appropriately budgeted. The trio share how to work out your purchase limit so that you don’t blow the budget and lose sleep!
4. When can you find out the reserve? The Planner, Buyer and Professor share the top tips for how to approach an agent to get the insider intel (that they’re not required to give you!).
5. Auction twists. Pre-auction offers, probate, family law, off the plan and different schedule auctions – find out the twists that can impact how the auction is conducted.
6. When to kick-off an auction with a low-ball offer. The trio share the psychology behind low-ball offers and when to use them.
7. Due diligence. Having the contract reviewed by your solicitor and conducting a building and pest inspection are critical steps to ensuring that you make property decisions that you don’t later regret. Buyer beware!
8. Finalising contract terms. How should you pay the deposit to the agent if you are successful and what is the settlement date?
9. And of course, our ‘gold nuggets’!

Resources:

• Bidding tactics 101 (Ep.20)
• Congenial negotiation tactics and how to apply them in the right situation (Ep.29)
• The art and science of removing emotions when buying property 
• Making the first move – why the first property you buy is the most important of all 
• The seven rules of bidding at auction 
• There’s more to an auction than just putting your hand up 
• Negotiate like a pro
• Top buyer’s agents reveal their secret sauce for negotiating a great deal
• How to negotiate a killer deal
• The critical mistakes of property investment – starting without a plan 
• The ‘best and highest’ method of bidding 
• Why short-term investing has long-term consequences 
• Property Cycle Management – why now is always the best time to buy if it suits your personal economy and you have a long-term property plan (Ep. 12) 
• Questions to ask when buying an investment property 
• How our mortgage strategy helps us to hold properties 
• Why your approach and assessment of risk is paramount to property success! (Ep.10) 
• Why the land-to-asset ratio of a property can determine its future price growth 
• How data can help property investors identify gentrification before it happens 
• Choosing whether to hold or sell investment property 
• How to succeed with Property and Create your Ideal Lifestyle 
• Mortgage Strategy 101 – YouTube video series. 

Market update– the Property Planner, Buyer and Professor’s insights

1. The recession has ended. The September quarter has seen an inflation rise of 1.6%, the largest quarterly jump in 20 years, marking an official end, (by definition) to the June quarter recession.
2. Good quality properties are going well above the reserve. On the ground, the Australian property market is hotting up and particularly for houses. CoreLogic figures released after recording on Friday 30^th October show that all capital cities (bar Melbourne) have increased in value over the month of October, marking the turn-around for Sydney which has increased by 0.1% after a drop of 0.3% in September. Melbourne continues to decelerate in value decline with a drop of only 0.2% in October from 0.9% in September.
3. ‘Subject to finance’ a key component of missing out. Ensuring that you have a fully credit assessed pre-approval in place is now as critical as ever, as we see many buyers miss out because they’re not willing to take on the risk of not having a ‘subject to finance’ clause

Show notes:

• The things that need to be done :
  • Inspect the property – in person! If you’re remote, you need someone that you trust 
  • Appraising – auction price guide or price range – too many buyers get swayed by this. In Vic there must be a statement of information with comparable sales. 
  • In SA, you can advertise a price but the reserve is not allowed to be more than 10% over that price. 
  • Look at comparable sales – but beware of when the properties were sold and how has the market moved over that period of time? 
  • If you’re looking to buy a property, it’s never too early to start tracking market prices.  
  • Due diligence – building and pest, council register for applications and approvals in the area, legal review, anything in the contract you want to challenge (must be done before the auction day) 
  • Deposit money – make sure the way you are going to pay will suit the auction.  
  • Agreed settlement date – 30, 60 days or more? 
  • Pre-auction chat – when are they going to be talking to the vendor? 
  • Budget setting – make sure you have enough time to set your limits.  
• How do you budget set 
• Investors – all about the numbers – we may stretch a couple of % if there is competition. Ideal price v where we think it’s going to land v walkaway price – the walkaway price should not be miles higher than the others.  
• Home owners – think about how frequently this type of property comes up for sale and what the impact will be emotionally if they miss it. A home owner might have a higher stretch budget than an investor. The stretch amount must be considered prior to auction. 
• Borrowing capacity – making sure your approval level is 5% or 10% above the stretch level. Have mechanisms to give you breathing room so you’re not trying to extend the upper level prior to the auction date. 
• Used to set a hard and fast rule, but if you’ve been looking for a while, do you still want to keep looking for another 6 months? And how will the market move in that 6 months. Put value on your time – all those Saturdays you spend visiting properties and doing market research? 
• Winner’s curse or buyer’s remorse – they don’t feel confident in the due diligence that they’ve done to ensure they can afford the price point they’re looking at and worrying they’ve over paid for it.  
• Don’t base your purchase price on borrowing capacity – base it on your cash flow. How much surplus funds do you want in your account after the purchase and how much extra do you want to be saving each month after settlement. How will this property purchase impact subsequent property purchases. This enables you to move forward with confidence.  
• How long before the auction can a buyer anticipate being privy to the reserve? If at all? 
• Vendors don’t often set the reserve until just before auction. 
• More often than not, vendors are waiting to see some signs in the market or info from their real estate agent as to what the reserve will be. 
• We can have a vendor set reserve once auction is starting. 
• Some of them will tell what they think it should be or what they have recommended it should be. More often than not, you can find out what the reserve is. 
• How can you get the reserve from the agent? How can I ask this question in a way that doesn’t make the agent uncomfortable? Are you privy to the reserve yet? Do you have an idea of where it will sit? Is that because your vendor is not talking to you about it, is it a bit complicated or are you reluctant to tell me? I’m looking for guidance, I’ve done some comparable sales, this is where I think it will be, I’m just looking to get some help with budget setting. 
• If an agent says it’s not the vendor you need to worry about, it’s the other buyers – it means that the reserve is reasonable, it’s the buyers that can make the price go above the reserve.  
• If you want to be successful on purchasing a property where there is competition, you need to be willing to pay more than anybody else. 
• What are some twists that most buyers don’t realise can apply to auctions? 
• Putting in an offer prior – mortgagee bank repossession or family law order, there is no negotiating behind the scenes. You need to ask the agent if you can put in an offer pre-auction 
• Different schedule auctions – people who may have a part-ownership participating in the auction, the schedule of the auction needs to be different, it needs to be prepared.  
• Probate – some trigger a process where the amount is over a certain value, it needs to go through the court. It can’t settle until this is sorted.  
• Off the plan subdivision still in titles office – if property has been developed, it needs to go through the titles office and this causes a delay because finance couldn’t be approved until the title is registered. This means for the whole time you’re waiting, you can’t do anything to jeopardise the pre-approval – like take a pay cut or change jobs.  
• What is the psychology behind making a low-ball offer? 
• Know your crowd – if you start low it can give the impression that the price should be lower, it could reset their thinking of value.  
• There may not be anyone else in the crowd who can challenge – set it low so that when you go inside you can try get the agent to reduce the reserve because they got the pricing wrong. 

Cate Bakos – The Property Buyer’s Golden nugget: when you’re doing auction prep, get all the information you possibly can, including understanding your competition. Find out who’s who in the zoo, by chatting to the agent the day before or two days before the auction. Find out when they are meeting with the vendor prior to the auction, put it in your diary and give them a call afterwards because that’s when the info will be hot off the press. How many bidders do you think will be there? Are there any advocates? How many building inspections have you had and how many contracts have gone out? That will give you a good idea of the strength of the competition.  

Peter Koulizos – The Property Professor’s Golden nugget: do all your research, work out what the property is worth, but if you’re going to pay an extra $1,000 think about all the extra time you’re going to spend looking for the next property and weigh it up. In the big scheme of things, if you’re paying hundreds of thousands of dollars to purchase a property, what is an extra $5,000?